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Knutkowski v. Cross

Court of Chancery of Delaware

October 13, 2014


Date Submitted: October 6, 2014

Sam Glasscock III Vice Chancellor

Dear Counsel:

This matter was before me on cross-motions for partial summary judgment. On October 6, 2014, I heard oral argument and disposed of the majority of the issues presented from the Bench. Remaining is the Defendant's Motion for Partial Summary Judgment regarding the effect of a promissory note, made on September 12, 1997 and effective October 1, 1997, obligating the Defendant to repay $85, 000 in monthly installments to George D. Knutkowski (the "Note"). The Note is a simple and unsophisticated contract requiring repayment of a loan that was made by Knutkowski to his then-girlfriend, later wife and now widow, the Defendant, Nonnie Cross. It was presumably drafted by the parties themselves. Mr. Knutkowski is now deceased. The Note indicates that upon Mr. Knutkowski's death, his rights under the Note did not pass to his estate; instead, his right to recovery passed to his son, George D. Knutkowski, II, one of the Plaintiffs here.

The Note called for repayment to be made in monthly installments of $900 over a ten-year period, with the first payment due January 1, 1998. I assume for purposes of this Motion for Partial Summary Judgment only that no payments were ever made on the Note, such that all payments are at issue. The Note did not provide for acceleration of the entire amount due should the debtor default on one or more payment obligations.

This action was brought by the individual Plaintiff on September 11, 2009. The parties agree that a six-year statute of limitations applies under 6 Del. C. § 3-118(a).[1] The single issue presented is this: Where a note calls for repayment of a loan in installments on discrete dates, but fails to provide for a right to accelerate when payments are in default, and where suit is filed to recover the amount due under the note at a time when the limitations period has run with respect to some of the installment payment obligations but not others, what portion, if any, of recovery under the note is permitted, or excluded, by operation of the statute of limitations?

For the following reasons, I find that only those payments due to have been made within the statutory period may be recovered. In the present case, this means that only those payments due after September 11, 2003, the date six years preceding the filing of this action, may be recovered upon a finding of liability.

A. Analysis

The Defendant's motion raises the statute of limitations and laches as grounds for summary judgment on the Note. While the "limitations of actions applicable in a court of law are not controlling in equity, "[2] this Court "will apply the terms of the statute in bar of a purely legal right which happens to be drawn into its cognizance where, had the action been at law, it would have been barred there."[3] Even in equitable actions, this Court "accords great weight to the analogous statute of limitations. In the absence of unusual or extraordinary circumstances, the analogous statute of limitations creates a presumptive time period during which the claim must be filed or else be barred as stale or untimely."[4]

The Defendant argues that the Plaintiff's suit was dilatory, that she will suffer prejudice as a result, and that as a matter of equity the Plaintiff's action on the Note should be barred by laches. As noted at oral argument, I am reserving any decision on the applicability of laches on the Plaintiff's various claims, some of them equitable in nature, until after trial. However, in considering the legal question of whether the statute of limitations bars recovery on the Note, I find that approximately half of the payments sought under the Note are barred by operation of Section 3-118(a).

My analysis begins with the statute itself, which provides that "an action to enforce the obligation of a party to pay a note payable at a definite time must be commenced within six years after the due date or dates stated in the note or, if a due date is accelerated, within six years after the accelerated due date."[5] Applied here, the statute bars action on payment obligations due before September 11, 2003. In arguing that he can recover the entire face value on the Note, the Plaintiff points to case law distinguishing continuous and severable obligations, suggesting that, because Delaware treats severability as a matter of the parties' intent, this is at least a factual issue requiring trial.[6] The cases on which the Plaintiff relies, however, involve contracts of a nature distinguishable from the installment payment provisions of the promissory note at issue in the present case.[7] Those cases involved agreements on which the accrual date of a breach could not be readily determined[8] or where damages were not ascertainable as of some intermediate date.[9]

The case at hand does not present the same kind of factual issue.[10] Because the dates on which the Defendant's obligations were due were defined precisely in the Note, as were the amounts to be repaid, under the clear language of Section 3-118(a), the limitations period began to run upon each discrete breach, on the date due. The same rationale precludes the Defendant's argument that the failure to file an action for the first breach of an installment obligation under the Note within six years bars any recovery under the Note.

I find our Supreme Court's holding in Worrel v. Farmers Bank of State of Delaware[11] helpful here. In that case, an installment sales contract provided that the Bank may elect to accelerate unpaid remaining obligations, though acceleration was not automatic upon a missed payment. The Court held that the statute of limitations (in that case, a four-year period under 6 Del. C. § 2-725) did not begin to run against the entirety of the amount to be repaid until the obligor had missed an installment payment and the Bank declared the remainder immediately due and payable under the acceleration clause.[12] Importantly with respect to the issue before me, the Court noted that its conclusion was consistent with pre-Uniform Commercial Code law on statutes of limitations in installment payment contracts, which the Court explained provided that

the statute of limitations began to run with respect to each installment only from the time it became due, unless the seller had the option of declaring the whole sum due and exercised that option, in which case the statute ...

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